Is it worth getting this account to save for your first home or retirement?
One of the best paying savings accounts is the Lifetime ISA, or LISA, thanks to the government funded 25% bonus added to deposits. It’s a great way to get free money! However, there are various limitations and restrictions, which mean it might not be the suitable for you. Here’s everything you need to know.
What is a Lifetime ISA?
A Lifetime ISA is form of ISA (Individual Savings Account) where not only can you save (in a Cash LISA) or invest (in a Stocks & Shares LISA), but you’ll also get a 25% bonus when you add money, up to £1,000 each financial year.
The bonus is paid on the new money you add each year. It’s not, as I’m often asked, something that is applied to all the money in the account each year.
You’ll earn interest on top, or make capital gains and earn dividends if invested, and they, along with the 25% bonus will all be tax-free since it’s in an ISA.
Why save into a Lifetime ISA?
It sounds obvious that you’d use this right? 25% free cash from the government is a no-brainer. Well, it is, but only if you’re going to use the cash for one of two reasons:
- You’re buying your first home, or
- You’re saving for retirement post-60 years old
If either of those work for you, then they can be really handy. However there are a few restrictions I’ll go into more detail on in a moment.
Also, it’s vital to be aware that there’s a 25% penalty if you withdraw the cash for any other reason unless you’re diagnosed with a terminal illness. That means you’ll get less out than you put in.
You’ll need to have had a LISA for 12 months before you can use it, though naturally this only applies to the first home redemption.
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Who can get a Lifetime ISA?
These LISAs are only open to UK residents aged between 18 and 39, though you can keep paying into one until you reach 50.
It’s possible to open a new LISA (perhaps for a better rate or lower fees) each year until the day before you turn 40 years old.
After the age of 40 some providers will still allow you to open a new LISA to transfer in money from an existing LISA. If you do this you can still add money until you reach 50. But you have to have started with another LISA before you turn 40. More on transfers further down the article.
If you use a LISA for your first home and are still under 40 you can always keep saving into one for your retirement.
How much can you save in a Lifetime ISA?
There’s a cap of £4,000 that can be added to a LISA each financial year (April 6 to April 5), and you can only pay into one LISA in the same period. This means you can’t add to both a Cash LISA and a Stocks & Shares LISA – it’s one or the other. Though you can have open new ones each year as long as you only pay into one.
There’s no limit to how much you can save over multiple years, though you’ll obviously be constrained by the annual cap and age cap.
The Lifetime ISA 25% withdrawal penalty
If you don’t use the cash saved for your first home or for retirement and want to access it, there’s a 25% withdrawal penalty.
This sounds like you just lose the bonus, but it’s actually a 6.25% penalty. Here’s an example.
- You save £800 in a LISA
- 25% is added, leaving a total of £1,000
- Laster, you need to withdraw the full balance of £1,000
- 25% is deducted, which ends up as £750,
- This £50 difference between the initial £800 and eventual £750 works out as 6.25%
And it gets more complicated as that 25% penalty will be applied to any interest or gains made. So say your £800 has grown to £1200 thanks to the £200 bonus and £200 in investment gains, the 25% charge will mean your gain is reduced to £150.
The only exception to this rule is if you’re diagnosed with a terminal illness. If that happens you can take the cash out without charge.
Using a Lifetime ISA for your first home
If you want to use a LISA for your first home, then you need to:
- Hold the LISA for at least one year (you can always put £1 in to start the process if you’re not sure you can wait that long)
- Buy a property that costs £450,000 or less
You can combine your LISA with one held by someone else if you’re buying a property with them and they’re also a first-time buyer. And you can still use your LISA if the other person has previously had a property.
The money in a LISA can be used either at exchange or completion.
If you already have a Help to Buy ISA (no longer available to new savers), then it’s worth considering which will be the best one for you.
Though there’s no penalty to withdraw cash from a Help to Buy ISA if you don’t use it for a home (other than lose the bonus), there’s a lower £250,000 property valuation outside London and your savings are capped at £15,000 in total, including the bonus earned.
If you do want to transfer an existing HTB ISA to a LISA, remember you’ll only be able to add in a maximum of £4,000 to the LISA each year.
Using a Lifetime ISA for retirement
If you can’t or don’t use your LISA for your first home, then the only other way to keep the bonus is to use it in retirement.
This means you must wait until you are 60 years old to access the cash, whereas workplace and personal pensions can be used 10 years before your State Pension age. Though that’s currently 65, it’s likely to be at least 68 for those with a LISA, and probably creeping up to 69 and 70.
Which ultimately means there’s little difference when you’ll first be able to use your money. Of course, unlike money held in a pension, you can access cash in a LISA earlier if you wish – you’ll just have to pay that penalty.
The other key difference to a pension is that with a LISA all the money is tax free when you use it, as opposed to just 25% with pensions.
However it will count towards your estate when inheritance tax is calculated, and it will also be included as savings if you ever need to claim benefits.
Where LISAs and pensions are the same is the bonus – at least for basic rate taxpayers. Pensions are subject to something called tax relief, which basically means you don’t pay tax on your pension contributions. A basic rate taxpayer (earning less than £50,270 a year), will get 20% tax relief. This is the same as a 25% bonus:
- £800 in a LISA will get a 25% bonus worth £200, adding up to £1,000
- £1,000 added to a pension will get 20% tax relief worth £200, meaning you only contribute £800
A pension will be better though for higher-rate taxpayers, as they’ll get the equivalent of 40% in tax relief. So it’ll cost £600 to have £1,000 in their pension.
But where pensions really win over LISAs is when your employer matches some of your contributions. Say they’ll put 5% in if you put 5% in, that’s an extra 5% you wouldn’t have if you put the cash in a LISA instead.
It means for most people a LISA is only the best option for retirement if you’re self-employed. And even then you’re still limited to that £4,000 a year savings. So realistically it’s not going to replace pensions, but could be in addition.
First home vs retirement: Which is the best use of a LISA?
For the vast majority of people, using a Lifetime ISA is a great way to boost your deposit on your first home. But you need to be wary of the £450,000 property limit. Though there’s pressure for this to be increased, especially for homes in London and the South East, it may not happen, and if it does, it might not be in time for when you buy.
It means if you can’t use it for house buying, you’ll either have to pay the penalty (there are also calls for this to be removed – fingers crossed), or keep it saved until you reach 60 – which might not be possible.
When it comes to retirement, I’d make sure you’re getting all the free cash you can from your employer before adding to a LISA. And if you’re a higher rate tax payer, I’d also focus on getting the 40% tax relief.
But it could be that having a LISA as well as a pension for further contributions is no bad thing as it gives you a little more flexibility on when and how you access your cash once you quit work.
There aren’t actually many providers offering a LISA, though your options are quite limited. Where you do have a choice is whether to go for a Cash LISA, which pays interest on your savings, or a Stocks & Shares LISA, where you invest money in the hope it grows and perhaps pays dividends.
Broadly you’ll want to go for a Cash LISA when you’re saving for your first home. This is because you’ll likely be saving every penny you can to boost your deposit, so you won’t want to risk a market fall reducing your balance just before you buy.
The interest rates can change regularly, but you’ll be able to transfer to some providers in future years if they have a better rate.
However if you’re using a LISA for retirement, or potentially if your house purchase is a long way in the future (at least more than five years away), then a Stocks & Shares LISA should provide you the best chance of growth. It’s about being in the game for the longer term, and then gradually reducing the risk of your investments the closer you get to actually needing the money.
When choosing a Stocks and Shares LISA, make sure you compare them with the following in mind:
- Do you want passive funds or more active ones?
- What are both the platform and trading fees?
You can also transfer between Cash and Stocks & Shares LISAs with some of the providers.
Lifetime ISA providers
The following are the main Lifetime ISA providers in the UK at the time of writing. I’ve also added whether they allow transfers from other LISAs, and if there’s a cut off age.
Cash LISA providers and transfer policies
You can see the best-paying Cash LISA rates in my regularly updated best savings account guide.
- Beehive Money – under 40s
- Moneybox – any age
- Newcastle BS – any age
- Nude – Under 40s
- Paragon Bank – any age
- Skipton BS- any age
Stocks & Shares LISA providers and transfer policies
If you transfer a Stocks & Shares Lifetime ISA, most will covert your investments to cash and then transfer the money across which you’ll need to reinvest. This can take a while.
- AJ Bell – under 40s
- Dodl – Any age
- Forrester – No LISA transfers
- Hargreaves Lansdown – No LISA transfers
- Nude – Under 40s
- Nutmeg- no transfers in
- Moneybox – any age
- One Family – under 40s
- Unity Mutual – under 40s, perhaps older too.
LISAs and other ISAs
That £4,000 maximum annual Lifetime ISA allowance comes out of your broader ISA allowance, which is set at £20,000 of new money each year.
You’re able to have other ISAs if you have more cash you want to save or invest each year. This means if you put the full amount into a LISA, you’ve got a cap of £16,000 to put elsewhere.
Since they’re separate it means even if you have a Cash Lifetime ISA, you can still contribute to a Cash ISA. The same goes if you have a Stocks & Shares Lifetime ISA and want a Stocks & Shares ISA.
Lifetime ISA summary
|Maximum annual contribution||£4,000|
|Bonus on each deposit||25%|
|Fee-free access||Buying your first home|
|Saving for retirement|
|Diagnosis with a terminal illness|
|Penalty for any other access||25% on whole withdrawal balance|